The market return is 12% and the risk free rate is 4%. Smallish Inc. has a market beta of 0.9, a SMB beta of 0.65, and a HML beta of .52. If the risk premium on HML and SMB are both 2%, using the Fama-French Three Factor Model, what is the expected Return on Smallish Inc. stock?
A) 4.86%
B) 7.46%
C) 12.3%
D) 13.54%

Question

Quizplus · Accepted Answer

The Fama-French Three Factor Model is calculated as: Expected Return = Risk-Free Rate + (Market Beta * Market Risk Premium) + (SMB Beta * SMB Risk Premium) + (HML Beta * HML Risk Premium). Here, it is 4% + (0.9 * 8%) + (0.65 * 2%) + (0.52 * 2%) = 13.54%.

The Market Return Is 12% and the Risk Free Rate